ESG investing remains fraught with challenges

livemint.com:

With global warming, dwindling biodiversity and rising pollution threatening posterity and widening economic disparities, campaigns such as Race to Zero and the United Nations’ Sustainable Development Goals matter more than ever. Investors these days are conscious about where their money goes, and environment, social and governance (ESG) has evolved as a framework to back businesses that take the conscientious route to profits. ESG funds have found favour among investors globally because they help meet responsible-investing goals while entrusting the arduous stock-selection process to fund managers.

ESG funds are mutual funds or managed investment schemes that specifically take into account the ESG performance of companies when deciding the mix of stocks in the portfolio. An ESG fund may be actively managed, with fund managers cherry-picking the stocks, or passively managed like index funds or exchange-traded funds (ETFs).

Also read: What are ESG rating providers and why should investors care?

ESG funds have the potential to play a significant role in promoting sustainability measures. They are not project finance, meaning they may not back specific sustainability projects of businesses. Rather, they ensure funds flow to companies that are deemed well-governed and socially and environmentally responsible based on the ESG criteria evolved by fund managers. 

The fund managers score these companies based on the data available from their sustainability reporting – including from the business responsibility and sustainability reports (BRSR) mandated by Sebi for the top 1,000 companies by market capitalisation. If such reporting is not available, they may seek information from companies to evaluate their ESG performance.

While